Although a penalty can be imposed by IRS for failure to file the partnership return, it will not be imposed if the failure is due to “reasonable cause”, i.e. a small partnership of a type that has not historically filed a partnership return (family farm partnership, family owned retail store partnership). Each member generally files a Schedule C (or F) setting out detailed statement of his share of partnership income and expenses. Thus SEI is accurately reported.

Sometimes a husband/wife who are partners will file a joint return. A consolidated Schedule C (or F) is filed; however, there is no way to divide net income shown on the schedule, so only one schedule SE is filed. This will cause incorrect reporting as all SEI will be credited to the record of the taxpayer whose name and SSN are shown on the Schedule SE (usually the husband). These situations cannot be identified except by the partners themselves.

Filing a partnership return is evidence that the parties considered themselves to be partners, and the failure to file a partnership return is evidence that the parties did not consider a partnership to exist.

However, neither the filing of, nor the failure to file a partnership return is conclusive evidence of the existence or nonexistence of a partnership.

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